Big hedge timed with debt ceiling

optionMONSTER

A huge put spread in the S&P 500 Index PM options is positioning for the possibility of a steep selloff in the coming weeks.

More than 54,000 SPXPM options traded, not far off the total open interest but far above the daily average of just 1,808 contracts in the last month. The action came almost entirely in an October put spread, as a trader bought the 1550 puts in big blocks for $1.95 and $2 while selling the 1500 puts for $1.  

The trader is spending $1 on this vertical spread , which is the maximum amount at risk. The maximum gain on this trade is $49, which would be realized if the S&P 500 is below $1500 at the October expiration in just over two weeks, which carries it just past the federal debt-ceiling deadline. (See our Education section)

The regular monthly SPX options expire on the morning of that same day. The weekly and quarterly options, on the other hand, are PM-settled. So the SPXPM options really come into play only on the Friday of the regular expiration and are not that widely traded.

But these contracts are clearly timed around the debt ceiling and are poised to make a huge profit if things go very badly. As such, this is very likely " tail-risk hedge " as opposed to an outright bearish bet.

The S&P 500 was down just 1.13 points to 1693.87 at yesterday's close. It was at an all-time high of 1729.86 two weeks ago and last below 1500 in late February.


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